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A collecting or collection agency is a third-party entity that works with creditors (businesses and individuals that have extended credit to other businesses and individuals) to recover monies owed on delinquent accounts or contracts.
The collection agency has to first enter into a contract with the creditor to perform this service. The creditor and the collection agency agree to the terms of the contract, including how much commission the collection agency will be paid for each recovered account. Alternatively, the collecting agency may actually purchase the bad debt (charge-offs) at a discounted rate, then add these costs back into the amount being collected. -
Once the contractual terms have been established and agreed to by the creditor and the collector, the delinquent accounts are turned to the collection agency by the creditor. If the collecting agency has not actually purchased the bad debt outright, the account still technically belongs to the creditor. The collection agency is a contractor handling the account collection process.
The account information is conveyed to the offices of the collection agency where the agency will assign each of the delinquent accounts to its employees. Once accounts are assigned to the collecting agency's employees, the actual debt recovery process begins. Collecting agencies use a combination of practices, the main ones being telephone contact and letter mailing. Letters used by collecting agencies to recover debt are called "dun" letters.
Collection agencies must operate within certain regulations concerning handling of accounts and the collection of debt. Individual collectors (employees of the collecting agency) are prohibited by law from disclosing the nature of their calls and letters to anyone but the actual debtor.
Collectors facilitate the process of making the contacts with the debtors and have a limited level of authority in establishing payment arrangements. -
These third-party collection agencies make money a number of ways.
1. The creditor pays the collector a commission based on the amount the creditor is able to collect. In this arrangement, the accounts still belong to the creditor. The collecting agency is merely assisting the creditor in the collection process.
2. Larger agencies have the available capital to purchase blocks of charge-offs (bad debt that has been written off as a loss by the creditor) for a mere percentage of the actual face value of the debt. Under this arrangement, the "ownership" of the debt transfers from the creditor to the collecting agency. The amount of the debt is then owed directly to the collecting agency rather than the creditor.
